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  • Nov 28, 2014
  • Updated: 11:41pm
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PUBLISHED : Thursday, 19 September, 2013, 12:00am
UPDATED : Thursday, 19 September, 2013, 4:13am

Spur competition and ease back on controls to keep rail reform on track

Hu Shuli says a market-based approach will encourage private capital to be invested in the system, following the break up of the ministry

China's rail reform is forging ahead in the wake of the imprisonment of former railways minister Liu Zhijun and a series of related corruption trails, including that of former top rail engineer Zhang Shuguang.

These scandals and lessons from history have prompted some people to take a closer look at the reform. After the former Ministry of Railways was split up, the State Council released a document asking to speed up reform of railway investment and financing.

The document, issued on August 19, provided some insight into the possible way forward. First, it revealed that ownership and the right to operate railway networks and services would be opened up to private investment. It also suggested the establishment of a development fund, financed by the central government, a move that would generate stable and reasonable returns on private capital investment.

It has become a major bottleneck in economic development due to the slow pace of reform

The document also indicated clear support for the development of stations and land along rail lines, promised that a fare subsidy scheme would be established, and stressed the need for market reforms for tariffs in the railway freight industry to boost efficiency and cut costs. All these proposals break new ground and shed light on how private capital can be directed into the industry.

However, the Liu Zhijun and related graft cases have shown that it is high time to fix the flaws in the system. These include the lack of separation of government function and enterprise management, a quasi-military management style, and the industry's monopoly status.

Seen as a vanguard of national economic development, the railway system has contributed significantly to the construction of transport networks and other infrastructure over the past 30 years. But it has also become a major bottleneck in economic development due to the slow pace of reform.

Officials in the Ministry of Railways blindly ignored competitive forces which just made the irrational state of network construction worse and led to an imbalance in supply and demand for services.

Given the high level of debt in the sector and the need for ongoing investment, the only way forward is to attract private capital investment into the industry.

However, that is easier said than done. The idea was twice put forward by the former Ministry of Railways but there was little interest, mainly because its dual roles as a branch of government and an enterprise created confusion.

Since the ministry owned the railways and the right to operate them, private investors in rail construction would have had no say in how things were managed. The ministry's control over the sector also meant fares and tariffs could not be adjusted in line with changes in the market. As a result, corruption was rampant, putting at risk any potential investor participation.

In light of the problems largely created by the relationship between the government and the market, financial reform is urgently needed. As well as the quasi-military style of management and monopoly constraints, other areas requiring attention include the management system and organisational framework.

Only when cost accounting and payment settlement systems become more transparent will it be possible to open up the industry to private investment.

Private investors will only enter the market when competition is introduced into rail-network construction and train services, and when a mechanism is in place to adjust fares based on market conditions. In fact, reform of the railway system shares something in common with reforms of other strategic industries such as electricity, telecoms, civil aviation and oil - which are mainly led by state enterprises. Reform in all these sectors is a two-step process: first, separate government functions from enterprise management; second, break up the monopoly by introducing competition.

The China Railway Corporation has retained the organisational structure of the Ministry of Railways and has authority over railway construction and operational matters, while the 18 railway administrations each manage one departmental section. This equates to the first stage of reform. In the next stage, competition must be introduced, and government controls relaxed.

Going forward, it's necessary to find a suitable business model for China's railway system. The question is which model - the US system, with fierce competition creating more than one line between big cities, for example; the European model that separates networks from transport; or Japan's model of integrated regional companies. Some experts have suggested adopting a hybrid, taking the best from each, based on the circumstances in different regions.

The whistle to kick-start railway reform has been blown. Now it's time for the train to leave the station.

This article is provided by Caixin Media, and the Chinese version of it was first published in Century Weekly magazine. www.caixin.com

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